Plan fiduciaries have prevailed on appeal – as they did at the district court level – against charges that they violated their fiduciary duties under ERISA by continuing to allow employer stock as an investment option, even as the firm slipped into bankruptcy.

The plaintiffs here – Manoj P. Singh, Jeffrey Snyder and William A. Gerhart – brought a class action lawsuit on behalf of those who participated in RadioShack Corporation’s 401(k) plan and held RadioShack stock in their 401(k) accounts after Nov. 30, 2011.

The RadioShack 401(k) Plan provided an investment menu with more than 20 investment options, and also had an employee stock ownership plan (ESOP) that allowed participants to invest their retirement savings in RadioShack stock, which was held in the RadioShack Stock Fund.

Shack ‘Shock’

During the class period, RadioShack’s stock price dropped from $11.48 per share to “pennies” as the company slumped toward Chapter 11 bankruptcy, according to the ruling of the U.S. Court of Appeals for the 5th Circuit. In an opinion authored by Chief Judge Carl E. Stewart, with Judges E. Grady Jolly and Priscilla Richman Owen joining, the court noted that the complaint “describes RadioShack’s demise at length, citing numerous articles that document the company’s descent from an electronics powerhouse to an obsolete brick-and-mortar retailer” – a decline that it notes was “…accompanied by a series of poor annual and quarterly financial results, including eleven consecutive quarters of substantial net losses and significant drops in income from year to year.”

Despite a series of turnaround initiatives, the stock continued to decline, and in early 2014, RadioShack’s financial advisors counseled the board of directors to consider selling the company or restructuring through bankruptcy. The court noted that the board of directors was also informed that the company’s creditors were restricting access to credit and vendors were demanding letters of credit as a condition of business, as the stock continued to lose value. In its regular meeting on June 20, 2014, the plan committee decided to send participants a targeted diversification letter. The court noted that in the committee’s eight previous meetings, it had reviewed RadioShack’s stock performance but had not expressly considered limiting or removing it from the plan.

Committee Consideration

In what was described as an “ad hoc” meeting on July 11, 2014 to consider the propriety of RadioShack stock as a plan investment option in view of a recent rating downgrade, including consideration of freezing or capping future contributions, removing the stock from the plan, and aggressively educating participants about the importance of diversification and risks of investing in a single stock. Ultimately, they decided to freeze future plan participant investment in RadioShack stock “as soon as administratively feasible,” which was Sept. 15, 2014. However, the committee declined to divest the stock, reasoning that it would force participants to sell their shares at an all-time low and would send a negative message about the company’s prospects.

Ultimately, RadioShack was delisted from the New York Stock Exchange and filed for Chapter 11 bankruptcy on Feb. 5, 2015. In October 2015, RadioShack stock was cancelled in bankruptcy proceedings.

Case, Closed?

As noted above, the three named plaintiffs in this class action had filed suit against the members of the plan committee, the board of directors, and the plan trustees, as well as the plan administrative committee and trustees of the RadioShack Puerto Rico 1165(e) Plan. The district court consolidated the cases. Shortly after the plaintiffs filed their class action complaint, they settled with the trustees. The district court granted the defendants’ motion to dismiss the first complaint but granted the plaintiffs leave to file a second, amended complaint. However, the district court concluded that the second, amended claim failed to state a cause of action and dismissed all of plaintiffs’ claims and entered final judgment – to which the plaintiffs appealed.

The plaintiffs alleged that defendants breached their fiduciary duties under ERISA by allowing the plan to invest in RadioShack stock – first, by failing to respond to public information spelling RadioShack’s financial ruin or insider information suggesting RadioShack’s stock was overvalued. Secondly, they argued that argued that the defendants violated the duty of loyalty – some by owning RadioShack stock, and others by not owning it. And thirdly, they argued that the director-defendants failed to monitor the Committee adequately.

In the decision, Chief Judge Stewart noted that ERISA requires fiduciaries to manage plan assets “with the care, skill prudence, and diligence… that a prudent man acting in a like capacity and familiar with such matters” would use under the circumstances – a duty that “trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.”

He went on to cite the Supreme Court’s ruling in Fifth Third Bank v. Dudenhoeffer, in which the U.S. Supreme Court clarified that the duty of prudence applies fully to ESOPs, except that ESOPs need not be diversified. Judge Stewart noted that Dudenhoeffer establishes that for publicly traded stocks, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” Thus, unless some “special circumstance[]” makes the market price unreliable, “ERISA fiduciaries … may, as a general matter … prudently rely on the market price” as a fair assessment of a stock’s value.

Under that standard, Judge Stewart concluded that the plan fiduciaries did not breach the duty of prudence by relying on market price as a fair indicator of the value of RadioShack stock. While the complaint referenced scores of news articles and analyst reports detailing RadioShack’s demise, “…the complaint provides no plausible reason that the negative commentary from these sources was not incorporated into the RadioShack stock price. On the contrary, the overall decline in the price of RadioShack stock during the class period shows that the market accounted for this negative information.” Moreover, the court concluded that “special circumstances” needed to exist, and that while the Supreme Court had not yet defined those, it has “said that such circumstances “affect[] the reliability of the market price as ‘an unbiased assessment of the security’s value in light of all public information.’” However, based on this standard, the court concluded that “none of Plaintiffs’ allegations are special circumstances as defined in Dudenhoeffer.”

Citing Tibble v. Edison International, the plaintiffs also alleged that the defendants failed to investigate the continued prudence of the plan’s investment in RadioShack stock and that that failure amounted to a “special circumstance.” However, Judge Stewart wrote that the plaintiffs did not plausibly allege that the purported lack of investigation had any effect on the reliability of the market price, “so it cannot be a special circumstance under Dudenhoeffer.” And since the complaint does not plausibly identify any special circumstances undermining the market price as a measure of RadioShack’s value, it did not state a duty of prudence claim based on public information, according to the court.

Indeed, the court found little evidence that RadioShack’s troubles were not completely taken into account in the stock price. “Plaintiffs did not plausibly plead that any Defendant had information not available to the public,” Judge Stewart wrote.

Moreover, the court noted that in order to state a duty of prudence claim based on nonpublic information, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” As other plaintiffs in similar cases have argued, the plaintiffs here argued that the defendants should have:

frozen plan contributions earlier;

disclosed inside information to the market to deflate the stock price;

liquidated the plan’s holdings of RadioShack stock after disclosing the alleged inside information;

sought guidance from the SEC or the Department of Labor;

resigned as plan fiduciaries; or

engaged outside experts as advisors or independent fiduciaries.

However, the court determined – as other courts have previously done – that a prudent fiduciary could conclude that each of these actions would have done more to harm the plan than to help it, and that therefore, the district court properly dismissed the plaintiffs’ duty-of-prudence claims based on insider information.

The court also dismissed the plaintiffs’ assertion that declining to invest in RadioShack stock constituted a violation of the defendants’ duty of loyalty. “Fiduciaries need not personally invest in any particular asset in order to fulfill their duties,” the court wrote. As for the allegation that the director-defendants artificially inflated the stock price to preserve their personal wealth, the court explained that the plaintiffs “…fail to point to any fact suggesting a conflict of interest other than Defendants’ stock ownership,” and held that the district court’s dismissal of those “bare allegations” was proper.

Fiduciary defendants have been successful at staving off litigation in similar cases, most recently including HP and Wells Fargo.